The Economy Is Again Under the Sway of Asset Prices

From Pento Portfolio Strategies:

The coming new year will be fraught with risk due to the removal of central bank and government supports. This could very probable atomic number 82 to the collapse of the most overvalued stock market in history.

According to the Briefing Board, US economical growth is set to slow from 5.5% almanac growth for all of 2021, to three.five% during 2022. Of grade, Wall Street apologists almost never predict a recession until we are in the heart of i. Nevertheless, information technology is clear that the growth of the economy volition slow significantly next year. And, in the view of Pento Portfolio Strategies, the risk of a recession and an asset chimera collapse is loftier.

Due south&P 500 EPS growth will plunge from 45% this year, to only 5-six% in '22. Again, this is the optimistic view that leaves a keen deal of room for error to the downside and most zero to the upside. After all, you can only open up an economy one time following a global pandemic, and that already happened this yr. And, it will be nearly impossible to comp the previous ii years' $6 trillion financial back up, along with the $four.six trillion expansion of the monetary base.

We recently learned from the Bureau of Labor Statistics (BLS) that Consumer Price Inflation (CPI) surged by half dozen.8%, and Producer Toll Inflation (PPI) shot up past 9.vi% y/y in November. This helped to send Existent Average Hourly Earnings down by ane.9 percent from Nov 2020 to 2021. CPI is running at a 40-year high and is at a rate that is 3.4 times higher than the Fed's asinine 2% target.

Of course, the clueless Fed finally started reacting to all this inflation past announcing at the December FOMC coming together that it would be speeding upwardly the stride of its taper past two times. But this is happening merely when the rate of inflation is actually peaking. In reality, Fed-Head Jerome Powell had no pick but to expedite the tapering of his QE program. After all, it is an untenable notion that the Fed should be adding to the supply of money at a breakneck pace when CPI is the highest since 1982. Merely without question, Mr. Powell deserves much derision for waiting until inflation reached a multi-decade loftier earlier starting to taper asset purchases, let alone begin to raise involvement rates off the current level of 0%.

It will take (ten) 25 footing signal rate hikes to achieve a 2.5% Fed Funds Rate (FFR), which the FOMC now regards equally a neutral overnight lending rate. Powell believes a neutral FFR would be 50 bps above the FOMC'due south ii% inflation target—assuming inflation falls to that level. In spite of these plans, the chances are very small that the Fed volition terminate up beingness able to hike rates very much at all before the entire artificial economic construct comes crashing down. This is because the yield bend is already rapidly heading towards inversion even before the tapering of QE has really even begun. An inverted yield curve is a predictor of a recession that has worked 100% of the time. The spread between ii and 10-year Notes has already contracted from 159 bps at the finish of March to just about 75 bps today. Meaning, past the time the QE taper is consummated, there probably won't be very much room at all to hike rates earlier an inversion takes place.

But regardless of the Fed'due south feckless nature, the fact remains that the biggest buyer and direct supporter of Mortgage-Backed Securities and Treasury Bonds, along with its stated support of corporate debt (including Junk bonds), will be exiting the market entirely come up March '22. This leaves a tremendously dangerous vacuum in place, specially in non-government-backed debt. The Fed's QE program has kept the massive real estate and equity bubbles afloat, as well as the $12 trillion worth of Business debt from imploding. But Powell's Put has expired because inflation is now a big problem.

And then, you lot must cistron in the stubborn COVID Delta variant and the new and more than contagious Omicron mutation, which Mr. Powell now views as potentially adding upwards pressure on inflation. This could cause the Fed to tighten its monetary policies even more quickly. The consumer will also exist left with the complete lack of any fiscal support of whatsoever significance next yr, after receiving $50k on average per American family over the previous 2 years.

The truth is, the solvency of almost every developed nation on globe is contingent on involvement rates that remain in the sub-basement of history–AKA, record lows and around zero percent. This is only possible if central banks maintain complete domination of free-marketplace forces and keep their hydraulic presses down on yields. Let's be honest, without the backstop of these state-endemic entities, solvency and inflation concerns would combine to forcefulness yields much college. In the case of the U.s., with CPI inflation at six.8% and a national debt-to-income ratio above 725%, it would be impossible for a 10-yr Treasury bond to yield just 1.4% without the heavy hand of the Federal Reserve. The point hither is that the US has immense solvency and inflation problem now, still still enjoys tape-low borrowing costs thank you to the Fed.

Even so, this role is now changing. A key bank can usually usurp the free market regarding its sovereign borrowing costs as long as both solvency and inflation concerns are quiescent. For example, the Fed has nevertheless to truly leave its yield curve suppression programs, which have existed for the amend role of the last two decades, because consumer price aggrandizement was not an outcome. This is true even though our Nation's debt to GDP ratio is higher today than any fourth dimension since WWII. Up until this point, that growing trend towards insolvency has been veiled thanks to the central bank's interventions. But the resurgence of inflation, in conjunction with that humongous debt brunt, has become extremely problematic.

In the absence of aggrandizement, central banks accept been able to print enough money to ameliorate recessions, bear markets, real manor debacles, and solvency concerns–such every bit the European debt crunch circa 2012. Where Bail yields in the southern periphery soared to 40% earlier European Primal Depository financial institution chief Mario Draghi promised to monetize the debt issues away. Over again, he could only achieve that considering inflation was non a concern a decade ago in the Eurozone.

Turning back to the US, the next recession, which is likely to occur in '22, will cause solvency concerns to fasten as revenue collapses and the National Debt-to-Federal-income ratio soars. However, this time around the Fed's ability to monetize away collapsing nugget prices and aging economic growth will be fettered by an aggrandizement charge per unit that is already many times greater than it is comfy with.

That leaves the Fed and Treasury with a unsafe dilemma: allow asset prices and the economy to implode, which will certainly set the inflation problem; but volition most likely lead to a depression. Or, try and pull the economic system and assets college by one time once again borrowing and printing multiple trillions of dollars, which will send the rate of aggrandizement skyrocketing from its twoscore-yr high. That volition risk destroying confidence in the USD and whatsoever faith that remains in the bond market place. Therefore, the stock market place and economic system would collapse anyway equally inexorably rising inflation pulls yields on sovereign, municipal and corporate bonds ever higher.

Wall Street's perma-bulls will never acknowledge that the Fed'south Put has at present expired. Of course, the Powell Pivot will indeed happen once again as he continues to meander betwixt hawkish and dovish depending on the lagging economic data he receives. But his next pivot back to an uber dove will only occur ex-post the Smashing Reconciliation of Nugget Prices. This is why a purchase-and-concord strategy no longer works and why identifying inflation and deflation cycles has become so disquisitional.

Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast chosen, "The Mid-week Reality Cheque"  and Author of the book "The Coming Bond Market Collapse."

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Source: https://www.dollarcollapse.com/pento-asset-prices/

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